Red Dragon Fund
The Shanghai Composite Index (SCI) has lost around 400 points in the last month and has breached the 2,000-point level.
The tiny trade volume indicates that retail investors still in the market are unwilling to unwind their holdings which have big floating losses. Those who have already cashed out are wary about getting back in.
According to some fund managers, most mutual funds have scaled back their stock exposure to just above the minimum 60%. These fund managers are now trend investors who buy stocks at the end of the trading day and sell them the next morning after tactfully drawing up the index.
Given the gloomy conditions, the Red Dragon Fund stayed well clear of the market. We had expected the SCI to bottom out at 2,000 but now 1,500 looks more likely. However, it was encouraging to see the the central bank take action in September, cutting interest rates on loans and lowering the reserve ratio for small banks.
Our heavy floating loss has come as we’ve waited for a rebound, but this patience is not unlimited. Should the 2,000 mark be broken without any sign of a revival, we may reduce our holdings by 30-40%.
Capitalist Roader Fund
That sound you hear is the freefall whistling of the Capitalist Roader Fund as it boldly plunges through another month.
We decided early on that we would not stand aside as our fund’s value evaporated. Instead, we took decisive action – a moral victory, we think, if nothing else. The action was the dumping of all of our shares in Hubei Guangji Pharmaceutical (000952) on September 1. The riboflavin producer had fallen an anvil-like 44% in just six weeks, and was threatening to catch up with our worst performer, Anhui Conch Cement (600585).
We probably shouldn’t have stopped with Guangji. Shortly after our move, Anhui Conch, which had been enjoying a several weeks of fairly flat performance, renewed its plunge. By September 12, it was down about 60% from June 3. Frankly, Conch’s fall looks irrational to us, particularly given expectations of higher cement prices.
But with the Shanghai Composite Index having fallen below 2,000, we’re thinking of cutting our losses. Stay tuned.